Slowing demand in U.S., Japan hits Taiwan hard

April Mo, The China Post

“The decrease in demand in the U.S. and Japan have hit Taiwan pretty hard,” said Brian Coulton, the director of Fitch Ratings’ Sovereign, Asia-Pacific operations as he began a discussion on Taiwan’s credit rating in Taipei yesterday.

He said that Taiwan’s exports had fallen 20 percent from last year, affecting the electronics and technology sectors particularly hard. The Asia-Pacific team of Fitch Ratings, an international credit rating agency, presented some preliminary findings yesterday of the company’s first ever sovereign rating of Taiwan, which will be reflected in the official rating in mid-September. While the researchers still need to feed the gathered data through risk models in London and New York, Coulton said that Taiwan should expect to get a rating with an “A”out of an A-range that goes from triple A+ down to a single A-. “We’ve arrived at a pretty challenging time” in Taiwan’s economy, he acknowledged.

After a first stage of information gathering, the company has concluded that “Taiwan is close to a technical recession,” said Coulton, meaning that the country has experienced negative growth two quarters in a row. In fact, the growth rate for the next quarter is expected to be under zero percent, the lowest Taiwan has seen in 20 or 30 years. According to Paul Grela, the associate director of financial institutions in Asia, the outlook for Taiwan’s banking sector is also “eroding.” “Our general outlook has deteriorated over the last 6 to 12 months,” said Grela. According to Grela, the weaknesses and threats to the financial sector in Taiwan include high government intervention, an unsophisticated credit culture, insufficient mechanisms for banks to liquidate assets, and over-banking. Grela said that the team is particularly concerned about the health of banking institutions’ balance sheets because the amount of non-performing loans is on the increase from an already high 9 to 10 percent. This rate represents “a large burden for Taiwan’s banks to bear” at this time, said Grela. Having observed what has happened to the banking sectors of other Asian countries such as Thailand and Korea, Grela is worried that Taiwan will fall into the same trap of underestimating the size of the problem and potential correction costs. “The scale of the problem can easily get out of hand,” he said. The company reports that other countries have had to spend a large portion of their GDP to clean up problems in their banking sectors because they didn’t recognize the impending disaster. The representatives from Fitch agreed that the best course of action right now would be for the government to urgently review fiscal policy as well as enact new legislation. In particular, they called for the passage of more financial reform laws, making the domestic banking sector more transparent in terms of availability of information and consolidation, and strengthening regulatory and supervisory functions. Ultimately, Taiwan’s rating should be on the same level as mainland China and Hong Kong. Taiwan is still recording a trade surplus and has very little external debt to other countries. Also, the low level of corporate sector debt should help Taiwan avoid serious financial instability.